Illinois Is Still Not Serious About Pension Funding

FILE - In this Nov. 6, 2018 file photo, Illinois Democratic gubernatorial candidate J.B. Pritzker speaks after he is elected over Republican incumbent Bruce Rauner in Chicago. Pritzker and Lt. Gov.-elect Juliana Stratton will be sworn in Monday, Jan. 14, 2019 in Springfield, Ill. Other constitutional officers _ all Democrats _ also will be inaugurated. Democrats also hold majorities in the Illinois House and Senate. (AP Photo/Nam Y. Huh File)

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Are you following Illinois's pensions, and watching to see how that state will handle its pension underfunding, and the annual contributions which absorb a quarter of the state budget, maybe with even a bit of schadenfreude if you're from elsewhere?

Gov. J.B. Pritzker is creating two new taskforces to look at consolidating the state’s public pension funds and transferring state real estate assets into pension funds. . . .

The first of these taskforces is unremarkable:

The Pension Consolidation Feasibility Taskforce will look at consolidating Illinois’ 671 public pensions in an effort to reduce administrative costs and increase returns on investment.

The second, not so much:

The Pension Asset Value and Transfer Taskforce will look at moving some of the state’s billions of dollars of real estate and infrastructure assets into pension funds to undercut the current $134 billion in unfunded liabilities.

"Recommendations could include, but are not limited to, the repurposing or sale of these assets or transfer to state pension systems to improve their levels of funding," according to a news release from the governor's office.

None of this makes any sense. Consider the tollway system: the tolls set, we Illinoisians are repeatedly told, are simply what’s needed to maintain the system over time. But what private entity is going to be interested in operating a tollway system at cost? Is the state admitting that its mismanagement means that there’s value in the system because a private sector business could turn a profit at the same level of toll fees as at present? Is the state grasping at straws, and willing to come up with any source of funds possible, without any greater regard for the next generation than Daley showed in selling off the parking meters?

Or, worse yet, is Pritzker and his administration simply appallingly indifferent to what it means to fund a pension plan? Do they intend to “transfer ownership” of the tollway to, say, the Teachers’ Retirement System, and imagine the status quo will remain in all other respects?

I’m not saying that a pension fund cannot own real estate, or an infrastructure-management company. But it has to have an identified market value, and it has to have a return on assets – or, rather, strictly speaking, a plan could hold assets which are expected to have no investment return, but then it must account for that expectation in the expected investment return rate it uses as the valuation interest rate. What’s more, if the state intends to transfer any such asset but still maintains control over the asset and prevents the fund from doing with it as it wishes, then to try to claim this as a true pension fund asset is a violation of any meaningful accounting norm.

We need to look at the funding schedule that was put in place 25 years ago, that at the time thought we would be spending about $4 billion on pensions and now it’s asking us to put $9 billion in. That is 20 percent of our revenues. And I don’t think the designers of that plan ever envisioned the state of Illinois putting 20 percent of its revenues into the pension systems. So we need to take a hard look at that. (Transcription at capitolfax.com)

When pressed by the interviewer, Hynes would not make a commitment to funding the required $9 billion. (Incidentally, the contributions to pension funds sucks up 20% of revenue; on top of that, the state is paying back Pension Obligation Bonds and paying retiree medical benefits.)

And yet, what's still not on the table, among the options Gov. Pritzker has said he's willing to consider, is any sort of pension reform to address the benefits promised and being paid which are so much larger than those which private sector employers paid even when Defined Benefits were the norm for those companies.

Update, February 14:

Mark Glennon at Wirepoints also addressed this and points out two other issues: any government tempted to "transfer assets" would likewise be tempted to assess the value of those assets, once in the pension fund, at inflated values. And regardless, they would be able to take an asset with a nominally low book value and, because pension assets are valued on a market basis, find additional money as if by magic - when the actual financial condition of the state and its pensions has not changed by a penny.

Does Illinois have a hope of fixing its pensions? Share your thoughts at JaneTheActuary.com!